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Ireland to beat world GDP growth for next two years

Wednesday, 20 April 2016

The Irish economy will grow at almost double the rate of the rest of the world for the next two years, and will remain the fastest growing country in the Eurozone despite ‘Brexit’ fears, according to Euler Hermes, the worldwide leader in trade credit insurance.

In contrast to global GDP growth, which will only register a +2.5% rise in 2016 before picking up slightly to +2.8% next year, Ireland’s economy will grow by around +5.0% this year and +4.0% in 2017. Ireland’s economic success story has been driven by significant post-recession competitiveness adjustments, labour market reforms, the depreciation of the euro and more exports to its main trading partners; the UK, US and Germany, which between them account for almost half of total Irish exports.

Irish GDP growth
Going forward, the expansion in both manufacturing and services sectors should remain strong, and Irish consumers will continue to benefit from the better economic outlook and support strong retail sales growth. External demand for Irish products should remain dynamic thanks to improved price competitiveness.

At the same time business insolvencies have registered double digit annual falls since 2013 and are expected to decline a further -10% in 2016. However, despite this decline the total level of insolvencies will remain three times higher than in 2007, the company stated in its Country-Report-Ireland.

“In contract to the Irish success story, more than 70% of world economy will slow down or be in recession in 2016,” says Ana Boata, European economist at Euler Hermes. “China, the US, the UK, Saudi Arabia and Turkey will register lacklustre growth rates. Argentina, Brazil and Russia will remain in negative territory.”

Global GDP growth
In its updated risk analysis for Q1 2016, ‘Why-is-Global-Growth-a-FLOP?’, Euler Hermes reveals subpar global growth, still below +3% for the sixth consecutive year, will affect a majority of countries – both advanced economies and emerging markets, adding an extra layer of risk to trade and exports.

Speaking today (Wednesday 20th April) at the 2iCF International IT & Technology Credit Forum in Dublin run by Forums International Limited, Ana Boata outlined how the main culprits for sluggish global growth compares to Ireland’s success story:

· Trade flows are anaemic. Global trade is set to contract in 2016 by -2% in value, after a fall of -10% in 2015. Judging by the number and record-value of cross border mergers and acquisitions, investment flows may pick up a notch. Yet capital flows remain wobbly. “Today, this is the issue the world economy is facing: capital flows that rise and fall, wreaking havoc on currencies and emerging market companies,” adds Boata.

· Liquidity should grow by +6% this year, but transmission to the real economy remains limited. This poses a major issue for sectors impacted by high debt levels and anaemic turnovers, such as commodities and machinery. “These liquidity pockets remain local, in Europe for instance,” notes Boata. “In contrast with emerging markets where liquidity is scarce, especially when it comes to extending credit for companies”. As a result, 2016 will see the return of non-payment risk. After six consecutive years of decline, corporate insolvencies worldwide will increase by +2%, mainly due to the turmoil in emerging countries.

· Oil is either too costly, or too cheap. While oil prices are set to remain low for longer, negative effects begin to appear. Countries whose revenues are heavily reliant on oil exports are often those that spent lavishly when price per barrel was sky high. The Arab states of the Persian Gulf and Saudi Arabia are part of the list, as well as Angola, Azerbaijan, Gabon, Equatorial Guinea, and Venezuela. Social tensions might escalate if governments push forward more subsidy cuts or tax hikes in an effort to compensate for the loss in revenues.

· Public policies are too hesitant and lack coordination. Thus a much needed strong stimulus to investment does not materialize. Rigorous fiscal consolidation and debt elimination haunt European economies less than in recent times. But the pace is not fast enough to spur growth. At the same time emerging markets begin to feel the blow of austerity measures aimed at decreasing public deficits. Even if in some countries such as China, India or Turkey sustained high public expenditure contributes to growth and rising debt, the private sector is spared from reducing its debt burden.

· Surprises have become more frequent and potentially create more disruptive shocks. Firstly, capital-controls introduced in myriad countries to curb currency volatility and capital flight have created downward pressure on trade, payments and repatriation of dividends. Egypt is a relevant recent example. Second, the political calendar is crowded with sensitive elections and referendums – from the US to the UK. The risk posed by Brexit is a case in question. Finally, the risk of an escalating conflict in the Middle-East remains high. A flare up could have repercussions across the region, and hurt investors’ appetite.

Brexit
Euler Hermes notes that the UK is the key international market for Ireland, generating 15% of exports and 37% of imports. In the short term Brexit could inflict a potential painful economic impact as Ireland has a trade deficit with the UK (one of the few EU countries in this situation) and import costs will be impacted by increasing import tariffs. However, the depreciation of the pound will counterbalance part of this shock.

In the company’s worst case Brexit scenario Ireland could lose at least 2pp of GDP growth in the first year if no Free Trade Agreement is signed between the EU and the United Kingdom post exit in 2019. However, a gradual recovery is to be expected in the following years as Ireland could attract some of the investments lost by the UK, notably in financial services.

“We believe a Brexit will not occur. However, should this happen it could prove costly for both Ireland and the UK,” concluded Boata. “Export losses of up to £30 billion and almost £200 billion in investments are at stake for the UK if no Free Trade Agreement is signed with the EU post exit. Ireland will be the country impacted the most because of the high level of trade, notably imports, with the UK.”

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